Jeffys, has no debt outstanding and a total market value of $120,000. Earnings b

Question

Jeffys, has no debt outstanding and a total market value of $120,000. Earnings before interest and taxes, EBIT, are projected to be $9,200 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. Kaelea is considering a $37,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,800 shares outstanding. Ignore taxes for this problem.

Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Round your answers to 2 decimal places

Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places

Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations. Round your answers to 2 decimal places

Calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places

Jeffys, has no debt outstanding and a total market value of $120,000. Earnings before interest and taxes, EBIT, are projected to be $9,200 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 22 percent higher. If there is a recession, then EBIT will be 33 percent lower. Kaelea is considering a $37,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,800 shares outstanding. Ignore taxes for this problem.

Explanation / Answer

Earnings per share, EPS, under each of the three economic scenarios before any debt is issued EBIT No.of Shares EPS= EBIT/4800   Recession 9200*(1-0.33)= 6164 4800 1.28   Normal 9200 9200 4800 1.92   Expansion 9200*(1+0.22)= 11224 4800 2.34 Percentage changes in EPS when the economy    % Change Expands (2.34-1.92)/1.92*100= 21.88 Enters a recession (1.28-1.92)/1.92*100= -33.33 2      Debt Issue 37000 Repurchased stock 4800/120000*37000 1480 Shares So, O/s shares = 4800-1480= 3320 shares EBIT(Normal) 9200 Less: Int. On Debt 37000*6%= 2220 EBIT(Normal) 6980 NEW Earnings per share, EPS, under each of the three economic scenarios before any debt is issued EBIT No.of Shares EPS= EBIT/3320   Recession 6980*(1-0.33)= 4676.6 3320 1.41   Normal 6980 6980 3320 2.10   Expansion 6980*(1+0.22)= 8515.6 3320 2.56 Percentage changes in EPS when the economy    % Change Expands (2.56-2.10)/2.10*100= 21.90 Enters a recession (1.41-2.10)/2.10*100= -32.86

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